Defendants-appellants Thomas Rybicki, Fredric Grae, and the law firm of Grae, Rybicki & Partners, P.C. appeal from the January 27, 2000 judgments of the district court, following a jury trial, convicting them of mail and wire fraud and conspiracy to commit mail fraud, in violation of 18 U.S.C. §§ 1341, 1343, and 371, based on. their practice of making payments through middlemen or expediters to insurance company adjusters in return for more favorable settlements in personal injury lawsuits.
Following an eight-week trial, the jury returned a verdict of guilty against each defendant on twenty counts of mail fraud, in violation of 18 U.S.C. § 1341, two counts of wire fraud, in violation of 18 U.S.C. § 1343, and one count of conspiracy to commit mail fraud, in violation of 18 U.S.C. § 371. Appellants Grae and Rybicki were each sentenced by the district court to terms of imprisonment of one year and one day, three years of supervised release, a $20,000 fine, and a $1,150 special assessment. The district court stayed appellants’ surrender pending appeal. Appellant Grae, Rybicki & Partners, P.C. was sentenced to three years’ probation, an $80,000 fine, and a $4,600 special assessment.
On appeal, appellants raise a host of legal and factual challenges to their convictions. Most of these claims are disposed of by a summary order issued simultaneously with this opinion. We write here only to address appellants’ argument that because the government failed to prove that the appellants intended to cause or actually caused economic or pecuniary harm to the victim insurance companies, there was insufficient evidence to establish that their practice of using an intermediary to expedite the settlement of personal injury claims through an insurance company adjuster with whom the intermediary shared his fee constituted a “scheme or artifice to defraud” within the meaning of 18 U.S.C. §§ 1341 and 1346.
We hold that in order to convict a defendant based upon a scheme to defraud another of the intangible right of honest services, as contemplated by 18 U.S.C. § 1346, it is unnecessary to prove that the
BACKGROUND
Because appellants challenge the sufficiency of the evidence to support their convictions, “we review all of the evidence presented at trial in the light most favorable to the government, crediting every inference that the jury might have drawn in favor of the government.” United States v. Walker,
Appellants are two Staten Island personal injury attorneys and their law firm. In order to obtain favorable results, either as to timing or amount, in settling the personal injury claims of their clients with the opposing insurance companies, appellants would offer a kickback to a middleman or intermediary who would approach the adjuster of the pertinent insurance company and arrange the settlement. It was understood by all concerned that the payments made to the middlemen, generally a percentage of the total settlement amount, would be shared equally between the middlemen and the adjusters. Although each of the insurance companies that employed the adjusters had written policies that prohibited the adjusters from accepting any gifts or fees and required them to report the offer of any gifts or fees, the payments offered to the adjusters were accepted by them but were not reported to their employers. Moreover, the participants of the conspiracy, including Grae and Rybicki, took considerable steps to disguise and conceal the payments made to the middlemen and the adjusters. Appellants were shown to have made payments to adjusters in at least twenty cases that settled for an aggregate of $3,000,000 between 1991 and 1994.
At the outset of trial, the government acknowledged that it would not seek to prove that the amount of any of the settlements had been inflated above what would have been a reasonable range for that settlement. It maintained, however, that the settlements were necessarily inflated above the amount that the appellants’ clients, personal injury plaintiffs (the “PI Plaintiffs”), would have been willing to accept by at least the amount paid to the middlemen and adjusters, since these amounts did not go to the PI Plaintiffs. The government also established the jurisdictional requisite of use of the mails and wires through evidence of phone calls made by the appellants to implement the settlements, settlement statements mailed by the appellants to the insurance companies, settlement checks (the fruits of the scheme) that the insurance companies mailed to the appellants, several payments that were invoiced and paid by mail, and mandatory filings, adulterated to conceal the payments, that were mailed to the New York State Office of Court Administration (“OCA”).
The government’s proof at trial included testimony from three of the middlemen involved in the scheme, including one who had formerly been an insurance company adjuster and had dealt with Grae in that
DISCUSSION
The mail and wire fraud statutes criminalize the use of the mails and wires in furtherance of “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses.” 18 U.S.C. § 1341 (mail fraud statute); see also 18 U.S.C. § 1343 (wire fraud statute). Appellants’ convictions were grounded on 18 U.S.C. § 1346, which provides as follows:
Definition of “scheme or artifice to defraud”
For the purposes of this chapter, the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services.
Congress enacted this provision in 1988 to expand the definition of “scheme or artifice to defraud” in response to McNally v. United States, in which the Supreme Court held that the mail fraud provision and, by necessary implication, the wire fraud provision were “limited in scope to the protection of property rights.”
Prior to McNally, most circuits had recognized the applicability of § 1341 to frauds involving “intangible rights,” including honest services frauds: “In the private sector, purchasing agents, brokers, union leaders, and others with clear fiduciary duties to their employers or unions [were] found guilty of defrauding their employers or unions by accepting kickbacks or selling confidential information.” McNally,
Notwithstanding the passage of § 1346, appellants argue that a conviction for honest services fraud under §§ 1341 and 1343 still requires proof of actual or intended economic or pecuniary harm to the victim — proof, they assert, was lacking in this case. We reject this effort to impose the rule enunciated in McNally on a conviction for honest services fraud. Such a reading would vitiate § 1346 and would contravene Congress’s clear intent to bring within the scope of the mail and wire fraud provisions fraudulent conduct that did not have as its object the deprivation of money or property of another.
Not surprisingly, no Second Circuit case construing § 1346 supports appellants’ argument. Rather, appellants rely almost
Our § 1346 cases have made clear, however, that the only intent that need be proven in an honest services fraud is the intent to deprive another of the intangible right of honest services. See United States v. Sancho,
Appellants also argue that even if an intent to cause economic harm is not a required element of an honest services fraud, some economic harm must, in any event, result from the fraud. They point to the government’s alleged concession that all of the personal injury claims here were settled for fair value to argue that no actual harm occurred in this case. This reading of § 1341 does not even conform to the rule announced in McNally: it was well-settled law both before and after McNally that the government does not have to establish that a scheme to defraud was successful or resulted in any actual harm to the victim. See Walker,
In short, we hold that, in proving “a scheme or artifice to deprive another of the intangible right of honest services” as the object of mail or wire fraud, the government need not prove either that the defendant intended to cause the victim economic or pecuniary harm or that such
Appellants next argue that § 1346’s expansion of the definition of a “scheme or artifice to defraud” to include a scheme or artifice to deprive another of “the intangible right of honest services” is unconstitutionally vague. Where there is a vagueness challenge to a statute that does not involve First Amendment freedoms, the statute must be evaluated on an “as applied” basis. See, e.g., United States v. Whittaker,
Vagueness challenges to the application of § 1346 and honest services fraud to similar conduct have been rejected by this and other circuits. See, e.g., United States v. Frega,
A panel of this court, however, recently upheld a vagueness challenge to § 1346 in the context of a bid contractor working for a state school authority who wilfully breached a contract requirement that he pay the prevailing wage to his employees. See United States v. Handakas,
While we agree fully with the Han-dakas panel’s observations concerning the
In light of Sancho and Middlemiss, we see no basis for finding § 1346 vague as applied to this case given that appellants are sophisticated attorneys who were presumptively aware that their payments to insurance adjusters to expedite claims created improper conflicts of interest for the adjusters with respect to their employers. In addition, appellants’ efforts to avoid detection, such as omitting required information on OCA filings and failing to record the bribes in any of their financial documentation, are indicative of consciousness of guilt, see, e.g., Bryan,
While we do not find that § 1346, as applied in this case, is unconstitutionally vague, we agree with appellants that because the statute does not define honest services, the potential reach of § 1346 is virtually limitless. See Frost,
Several circuits, addressing this concern, have interpreted “scheme or artifice to deprive another of the intangible right of honest services” in such a way as to properly curtail the statute’s reach. See, e.g., id. (recognizing “the risk that federal criminal liability could metastasize” if § 1346 were read too broadly); Frost,
Some courts have imposed a requirement that the misrepresentation or omission at issue be “material,” such that “an employee has reason to believe the information would lead a reasonable employer to change its business conduct.” Gray,
While we see merit in each of the approaches taken by the different circuits, we believe the “reasonably foreseeable harm” standard to be superior because, in contrast to the other tests, it focuses the inquiry on whether the scheme at issue created a foreseeable risk of economic or pecuniary harm to the victim, which is consistent with traditional notions of fraud and fraudulent harm. See McNally,
The standard we announce today clearly encompasses the economic risks that have been recognized by other circuits, such as the economic risks created by inducing an employee to disclose confidential trade secrets to a competitor, see, e.g., Martin, 228
This prudential limitation on the reach of § 1346 is consistent with our previous decisions upholding convictions under § 1346. For example, in Sancho,
Accordingly, we hold that the elements necessary to establish the offense of honest services fraud pursuant to 18 U.S.C. § 1346 are: (1) a scheme or artifice to defraud; (2) for the purpose of depriving another of the intangible right of honest services; (3) where it is reasonably foreseeable that the scheme could cause some economic or pecuniary harm to the victim that is more than de minimis; and (4) use of the mails or wires in furtherance of the scheme.
Applying this standard to the case at hand, we find it to have been fully satisfied in light of the evidence presented at trial and the instructions given to the jury. We will affirm a jury verdict if any rational jury “could have found the essential elements of the crime beyond a reasonable doubt.” See Walker,
The district court properly instructed the jury that in order to convict the appellants, they had to find that it was “reasonably foreseeable [to the appellants] that the companies in question might suffer economic harm as a result of the breach of the employee’s duty.”
Based on the evidence presented at trial, the jury could have reasonably concluded that appellants, in offering a percentage of the settlement as a kickback to the insurance company adjusters, intended to obtain favorable treatment from the adjusters at the expense of the insurance companies’ intangible right to the adjusters’ undivided loyalty and honest services. In addition, the jury could have found that it was reasonably foreseeable to the appellants that the effect of the payments made to the adjusters would have been to provide an incentive to the adjusters to not seek the lowest settlement amount or to not delay the settlement, thereby depriving the insurance companies of the difference between the most favorable settlement the adjusters could have otherwise obtained and the settlement actually agreed upon or the time value of money
We reject appellants’ efforts to define the deception at hand as a failure by the adjusters to report gratuities to their employers and to argue that this deception was immaterial to the settlement of the personal injury suits.
We are also unpersuaded by appellants’ uncontested assertions that the insurance claims were settled within a reasonable range and that they intended no economic harm. First of all, even if these assertions are true, appellants’ argument conflates the concepts of actual and intended harm with reasonably foreseeable harm. See, e.g., Vinyard,
To recap, we hold that to convict a defendant of mail or wire fraud where the purpose of the scheme is to deprive another of the intangible right of honest services, as defined by 18 U.S.C. § 1346, the government does not have to prove actual or intended economic or pecuniary harm, but it does have to prove that it was reasonably foreseeable that the fraudulent scheme could result in some economic consequence that was more than de minimis. Because this requirement was satisfied in the instant case, we affirm the judgments of the district court convicting appellants of mail and wire fraud, and conspiracy to commit mail fraud, in violation of 18 U.S.C. §§ 371,1341, and 1343.
CONCLUSION
The judgments of conviction are affirmed.
Notes
. We do not rule out the possibility that the government in this case could have established actual or intended economic or pecuniary harm had it been required to do so.